The Plot Thickens: DOL Fiduciary Rule Struck Down
Updated: Jun 11, 2018
In a move that was a surprise to some, and a foregone conclusion to others, the 5th Circuit Court vacated the entire Department of Labor’s fiduciary rule this past March. The rule, which was created to require financial professionals to act as a fiduciary when working with retirement accounts, had been on the rocks since its inception. Numerous lawsuits had been filed against the DOL, mainly by insurance and annuity companies, based on the premise that the rule is unreasonable and the fact that the DOL isn’t authorized by Congress to regulate insurance and annuity companies (the states do). Of course, there have been other lawsuits filed based on other grievances, but the root of the problem is best summed up with a quote from Elliot Weissbluth of HighTower Advisors: “This is not a complicated argument. Those people who are complicating it are doing so because they have an economic interest in not putting the client’s interest first.”
Let’s put a number on these “economic interests”. In 2015, a year before the rule was introduced, a report was issued by the White House Council of Economic Advisors that found that biased advice was responsible for taking $17 billion a year from retirement accounts. People depend on retirement accounts to fund life after working, and unfairly taking money from them is among the most despicable acts a financial professional can perpetrate. This number provides a poignant reminder that a fiduciary rule of some kind is absolutely necessary when dealing with retirement accounts. Let’s go over what exactly a fiduciary is: It is someone who is bound legally and ethically to act in the best interests of others. Essentially, a financial advisor who is a fiduciary is bound by law and ethics to do what is best for his or her client, without regard to profits or anything else. This standard is in contrast to the suitability standard, which is followed by most insurance and annuity companies, and even some registered investment advisors. The contrast between fiduciary and suitability can be explained thusly:
Imagine you are in the market for buying a car. Right down the road from your house is a Ford dealership, so you head there to see what your options might be. You meet with a salesman who asks what kinds of features you are looking for in a vehicle, so you tell him. If the salesman is following the suitability standard, this is how the situation would play out: He comes back and says that a brand new Ford Escape would fit your needs amazingly! All you need to do is complete some paperwork and you’ll be on the road in your new car. What he doesn’t say, however, is that there is a Jeep dealership a few miles up the road with a product that fits your needs as well, and also happens to be several thousand dollars cheaper. You remain ignorant of this fact, sign on the dotted line, and the salesman gets his commission. Were the salesman a fiduciary, he would have been legally and ethically obligated to inform you of the better deal offered at the Jeep dealership, thereby saving you thousands of dollars. Unfortunately, he did not.
So, where do we go from here? Will these companies that follow the suitability standard continue to get away with providing biased advice? In the short-term, yes. The DOL could fight the 5th Circuit Court’s ruling and take the case to the Supreme Court, but that decision would be long and drawn out. The SEC is currently developing their own process for cracking down on biased advice, though some criticize it for being too lenient. As it was a huge point in the 5th Circuit’s decision of striking down the DOL’s rule, states are also developing versions of a fiduciary rule. Though these reports seem to be encouraging, having 50 different versions of a fiduciary rule would be a compliance nightmare for any company doing business or having clients in multiple states. If you tend to walk on the brighter side of life, have faith that in the long-run, proper government entities will be able to regulate financial companies to provide unbiased advice.
If you are a consumer of financial services, what do you do now? First and foremost, be absolutely certain that the individual or company that you are doing business with is a fiduciary. If you are a client with SAS, LLC, you already know that we are a fiduciary. We make every effort to convey that our advice is given with your absolute best interests in mind. If you are not, confirm that the professional you work with is a fiduciary. Do you have a 401(k) you contribute to? Check with your HR rep to see when the next plan review is. Have an IRA? Check to make sure whoever manages it is a fiduciary. Above all, if you think you’re being taken advantage of, don’t be afraid to ask for a second opinion from a source that is a known fiduciary. Want to know a quick way to verify whether a person is a fiduciary? Check to see if he or she is a CFP®. All CFP®’s are bound to the fiduciary standard. We are proud to say that all of our financial professionals are either CFP®’s or pursuing their CFP®. Feel free to come to us for a second opinion, we promise to do our best to set you on the best path possible.